The Bangko Sentral ng Pilipinas (BSP) has recently launched the third phase of its sustainable finance regulations with the issuance of Circular No. 1149 or “Guidelines on the Integration of Sustainability Principles in Investment Activities of Banks.”
The circular’s guidelines were approved last August 23, 2022, with BSP Governor Felipe M. Medalla saying that the new rules will help address sustainable finance essentials, particularly its safety and soundness.
The first and second phases of the BSP’s regulations have set out expectations for the integration of sustainability principles in a bank’s core strategies, governance, and risk management frameworks. These rules also included the principle of proportionality, which takes into consideration a bank’s size, risk profile, and complexity of operations.
“We expect that the (new) circular will further facilitate financing to sectors aligned with the sustainability agenda,” he said. “This latest issuance covers the investment process, which is another significant area of banking operations. It is meant to complement the earlier issued circular of the BSP covering the lending operations of banks.”
“The new guidelines set expectations on the prudent conduct of investment activities and the minimum practices banks should establish for the management and control of risks associated with investments,” Medalla added.
Following the release of the central bank’s latest circular, the BSP chief said that he is hoping more banks in the Philippines will be able to incorporate sustainable finance and “green financing” in their decisions.
Sustainable finance is defined as “any investment decision that takes into account the environmental, social, and governance (ESG) factors of any economic activity or project.” Green financing, meanwhile, is the act of increasing the level of financial flows from banking, micro-credit, and insurance, as well as the investment from the public, private, and not-for-profit sectors to help address climate change and other sustainable development priorities.
The new BSP guidelines explained
The latest guidelines cover banking book investments or debt and equity securities portfolios that are not being traded by the bank as part of its proprietary position.
The rules, however, don’t apply to the following: investments that grant control over an enterprise and are accounted for using the equity method; transactions in derivatives involving stand-alone contracts; and receivables arising from repurchase agreements.
According to the BSP circular, banks are now expected to consider their sustainability objectives in their investment activities and to ensure that such investments can contribute to sectors that are considered to have a beneficial impact on the environment or on society.
“In line with this, banks should adopt policies implementing the sustainability objectives of investment activities. The guidelines provide sample approaches, such as exclusionary screening or best-in-class selection, and allow banks to adopt other practices that consider their sustainability objectives and their investment policies,” the circular said.
The new circular also expects banks to assess if the investment and the issuing company are exposed to environmental and social (E&S) risks, and to analyze potential exit strategies in case the said investment turns out to have high E&S risks. The banks’ due diligence review, according to the BSP, should also be supplemented further with results coming from an external review provider.
Under the BSP’s risk management framework, any bank’s policies and procedures, including limits, should be able to adopt a combination of integration, screening, and thematic approaches.
The circular also noted the misleading practice of “greenwashing,” which is a deceptive way of marketing in order to persuade the public that an organization’s products, aims, and policies are environmentally-friendly. It includes the dissemination of misleading information regarding a company’s environmental strategies, goals, motivations, and actions that can induce a “false positive perception” in a company’s E&S performance.
The BSP said banks should adopt measures to ensure that their investments are channeled to companies that comply with sustainability-related standards, laws, and regulations as well as companies that do not engage in greenwashing.